Guidewire Sticks to Its Profitable Niche

 | Jun 12, 2012 | 7:15 AM EDT  | Comments
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GWRE

If there is anything worse than dealing with an insurance claim, it's dealing with a claim that gets lost in the insurance company's maze of software, agents and claims processors.

Most insurance companies' software systems are virtually antiques, as the industry has been one of the slowest to exit the old mainframe era and embrace the cloud.

This glacial pace of change has been very fortuitous for Guidewire (GWRE), an emerging growth company that has a unique solution for the insurance industry and which has made great progress at making itself a one-stop shop for progressive insurance business IT managers.

Guidewire is proud to state that it serves only one industry and focuses on just one challenge within that industry. It sees its pigeon-holing as a badge of honor rather than a liability.

The company provides core software systems for the property and casualty sector, addressing more than 90% of the big industry's everyday activities, including underwriting, policy administration, billing, claims and reinsurance management.

 

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Headquartered in San Mateo, Calif., Guidewire has offices in Beijing, Dublin, Hong Kong, London and Tokyo. In other words, it's big time, not just a handful of software developers banging out code in a suburban industrial complex.

Guidewire's core product is its InsuranceSuite platform, a complete set of applications designed to replace outdated legacy systems of insurance carriers. The company looks to improve margins for its clients by streamlining many activities and allowing for easy office integration and reduced IT budgets.

The platform has three primary applications, PolicyCenter, BillingCenter and ClaimCenter, which all address and support a core function of the property and casualty insurance policy cycle. The PolicyCenter is a flexible policy administration application that serves as a complete system of record for underwriting, quoting, binding, cancellations and renewals. By automating these functions, insurance companies reduce the cost of managing a standard policy.

The BillingCenter package manages the entire billing lifecycle, from payment plans and agent commissions to invoice management. What differentiates Guidewire's software from that of many peers is the full platform integration, as the BillingCenter communicates with the PolicyCenter, allowing automatic policy cancellation should payment become delinquent, for example.

Meanwhile, the ClaimCenter application manages the intake, assessment, settlement and processing of all financial transactions. It's the most widely used web-based claims system in the sector, serving as a jumping-off point for the firm to upsell the other components of the InsuranceSuite platform.

According to researchers at Deutsche Bank, the property and casualty insurance industry spends more than $3 billion a year on software and more than $10 billion in total on IT services. This allocation is expected to grow more than 16% annually over the next several years as companies look to replace older mainframe-based systems with up-to-date web-based solutions.

Within that addressable market, Guidewire targets the 1,000 largest P&C firms in the world, and it currently has more than 100 under contract. Fewer than 20 are utilizing the entire suite of applications, so the company has tremendous growth opportunities not only for new customers but for increased sales to existing customers.

Marcus Ryu, who co-founded the company in 2001 and previously managed departments as diverse as engineering, marketing and strategy, is now chief executive officer. Prior to starting Guidewire, he was an executive at Ariba and a manager at McKinsey & Co.

Sales are evenly split at the firm between the U.S. and international markets, and despite its success, Guidewire controls only about 5% of the overall market. The vast majority of insurance carriers are still using in-house systems that are decades old, but like many other industries, it is beginning to migrate to cloud-based solutions that can provide easier integration and access across offices and geographic regions.

Typical licensing revenue is generated from renewable five-to-10-year contracts, and this creates excellent visibility for the future. For example, because of the recurring revenue model, more than 85% of sales for the upcoming year are already recognized, and every new contract signed.

Over the past five years, revenue grew by 42% annually, and amazingly, Guidewire has a 100% customer retention rate, something very few firms in any industry can claim. Shares went public in January and are up 35% since then, yet the company's valuation is largely in line with the overall peer group, providing an excellent value proposition. It could be potentially bought around the $22.50 area for a trade, or if you are patient, there could be a dip toward $17.50 later in the summer. 

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